Weapons Acquisition:

Warranty Law Should Be Repealed

NSIAD-96-88: Published: Jun 28, 1996. Publicly Released: Jun 28, 1996.

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GAO reviewed the Department of Defense's (DOD) use of major weapon system warranties, focusing on whether these warranties: (1) provide expected benefits to the government; and (2) are compatible with the weapon systems acquisition process.

GAO found that: (1) DOD receives about $1 in direct benefit for every $19 paid to a contractor for a warranty; (2) DOD program officials rarely seek to waive the warranty requirement because waivers require the approval of an Assistant Secretary of Defense and congressional defense authorization and appropriations committees; (3) despite DOD regulations that require a cost-benefit analysis to determine if the warranty is cost-effective, some cost-benefit analyses are inadequate; (4) the military services are not conducting post-award assessments to determine whether warranty costs are commensurate with the benefits received and to identify advantageous and disadvantageous warranty provisions for future contracts; (5) the government has traditionally self-insured because its large resources make protection against catastrophic loss unnecessary, and it is often the sole buyer for a product and cannot share the insurance costs with other buyers; (6) because a contractor cannot allocate the cost of insuring against the risk of failure among multiple buyers, DOD ends up bearing the entire estimated cost; (7) DOD officials said that warranties do not motivate contractors to improve the quality of their products; and (8) warranties only extend the period that DOD can determine that a product does not conform to contract specifications and requirements and require the contractor to make repairs.

Matter for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: The fiscal year 1998 Defense Authorization Act repealed 10 U.S.C. 2403.

    Matter: Since DOD continues to have problems administering weapon system warranties and the warranties provide minimal benefits for the costs incurred, Congress should repeal 10 U.S.C. 2403. Were the warranty requirement repealed, DOD and the services would still have management flexibility to obtain warranties for major weapon systems only when deemed appropriate. As was done prior to the warranty law, DOD and the services would rely on the Federal Acquisition Regulations and their own policies to determine when it is appropriate to obtain a weapon system warranty. The decision should be documented as part of the system acquisition strategy.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: DOD's Director of Defense Procurement issued a memorandum to the military departments emphasizing the need to use waivers when appropriate. In addition, the military departments were asked to review their waiver process to ensure that it is efficient.

    Recommendation: The Secretary of Defense should establish an expedited waiver process that limits the disincentives inherent in the current process.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: DOD does not agree with the necessity for separately pricing warranties.

    Recommendation: The Secretary of Defense should revise DOD acquisition policies to adequately manage those warranties that the military services determine should be obtained. Consideration should be given to requiring that all weapon system warranties be separately priced in order to allow meaningful cost-benefit analyses.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: DOD's Director of Defense Procurement issued a memorandum to the military departments emphasizing the need to perform proper cost-benefit analyses on warranties.

    Recommendation: The Secretary of Defense should revise DOD acquisition policies to adequately manage those warranties that the military services determine should be obtained. Consideration should be given to improving cost-benefit analyses through more realistically reflecting the likelihood of claim submission, performing present value analyses, and including the government's administrative costs.

    Agency Affected: Department of Defense

  4. Status: Closed - Implemented

    Comments: DOD's Director of Defense Procurement issued a memorandum to the military departments emphasizing the need for in-process and post-assessments of warranties.

    Recommendation: The Secretary of Defense should revise DOD acquisition policies to adequately manage those warranties that the military services determine should be obtained. Consideration should be given to ensuring that the services enforce the regulations requiring post-award assessments of weapon system warranties so that the services will know why these warranties were or were not beneficial to the government.

    Agency Affected: Department of Defense

  5. Status: Closed - Implemented

    Comments: DOD does not plan to require the military departments to revise their regulations. DOD believes that the current regulations are adequate. However, DOD will emphasize the importance of post-award assessments in its planned memorandum to the military departments.

    Recommendation: The Secretary of Defense should direct the Secretaries of the Air Force and the Navy to revise their regulations to require a final payoff assessment for weapon system warranties as the basis for purchasing more beneficial follow-on warranties and building industrial knowledge for procuring and administering effective warranties.

    Agency Affected: Department of Defense

 

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